Lower Interest Rates May Spark Rental Crunch

Demand for rental housing in Palm Beach County will continue to be strong for the next two years, and declining interest rates could cause a rental crunch by taking thousands of units off the market.

A new study on the Palm Beach County rental housing market by Fort Lauderdale-based Reinhold P. Wolff Economic Research Inc. reveals that demand could very well outstrip supply both this year and next as developers fail to keep up with the need for apartments.

The report forecasts a need for as many as 8,700 additional units in the county during the next two years beyond what is already under construction or planned.

Palm Beach County`s rental stock includes about 74,000 units, and has a peculiarly Floridian makeup.

About 71.6 percent of the rental market is made up of investor-owned units, including condominiums, townhouses, duplexes and single-family homes. Only 28.4 percent of the market is comprised of conventional rental apartment units.

Keith White, president of Wolff Economic Research, said the proportion of investor-owned units has soared in recent years -- a change that makes the rental housing market interest-rate sensitive.

As recently as 1970, 64.6 percent of the county`s rental market was made up of conventional apartment units, but a condominium boom changed that.

``It`s something that developed over the last decade. A tremendous shift has occurred over the years,`` White said.

Many people bought the condominiums as an investment, with the intention of selling in a year or two after prices had risen.

But a soft condo market and rising interest rates have made it impossible for many people to sell their condos at a good price, so some have turned to renting them out instead, White said.

This has increased the availability of rental housing, but a decline in interest rates would make it easier to sell the units, effectively removing them from the rental market.

``If interest rates were to drop, they could sell them very quickly,`` White said.

The vacancy rate in rental apartments currently is 5.8 percent. But an interest rate decline with a concomitant decline in the number of investor- owned units available for rent could force vacancy rates sharply downward.

As recently as 1980, low interest rates helped to produce a severe shortage of rental housing in Palm Beach County, and the vacancy rate was under 1 percent.

However, the pace of conventional apartment development is accelerating.

Developers started construction on 2,240 units in the 21-month period that ended in September -- more than double the number of units started in the preceding eight years.

As these become available, many people currently living in investor- owned units are expected to move into the less expensive apartments, White said. He noted that the average rent for an apartment currently is $422, while the average for investor-owned units is $596.

But he said construction of apartments has picked up recently, and developers have to take that into account before making plans to build more apartments.

``There is always a possibility that development will accelerate. It`s possible that the market will become oversupplied,`` he said.